This Is How To Know If Trading Cryptocurrencies Is For You
With growth we come to realize that not everything that is good is right for us. And that is absolutely okay. If anything, this golden life principle is most applicable when it comes where to invest your money. Although there are wonderful things to be said about investing in cryptocurrencies, the truth is they are not for everyone.
Are Cryptocurrencies your type?
Let’s not romanticize just how volatile cryptocurrencies are. Just last month, the price of Bitcoin was at $1808.85 on the 14th of May, it shot up to $2718.33 by the 25th, and just 2 days later, on the 27th the price was back down to $1865.28. According to some advisers, such volatility in the short term makes investing in it unsuitable for most investors. In order to realize the best return of investment from this asset class, one has to embody an investor personality leaning more towards the aggressive type.
Investors with this personality type are usually invested for a span of 5 years or more and are unaffected by short term market movements, focused more on their long term growth strategy.
Click here to find out your investor personality type
This is why some experts advise making sure it’s a very small part of your diversified portfolio. And that you invest in proportion to your knowledge and experience.
However, although the volatile nature of cryptocurrencies may work against the investor, they are certainly the trader’s bread and butter.
The art of trading cryptocurrencies
Trading and investing are not the same thing. According to Investopedia “the goal of investing is to gradually build wealth over an extended period of time”. Whereas trading “involves more frequent buying and selling with the goal of generating returns that outperform buy-and-hold investing.”
When it comes to trading there is no better textbook than experience. You need to be willing to get your hands dirty.
Although trading is not the best strategy for accumulating long-term high returns, there are a few recommended guidelines from experienced traders on how to get your head in the game as a beginner.
1. Develop a strategy:
The first component of developing a strategy entails deciding on the amount that you feel comfortable with losing completely.
Always try to minimize your risk by being prepared for the worst case scenario.
By not putting in more than you can afford to lose, you are ensuring that you will always be in a good position financially, even in the most negative case.
Being over invested may reduce your ability to make rational decisions.
You expose yourself to the risk of ‘panic selling’ when the market moves slightly down. This could lead to increased losses, as you will most likely buy back at a higher price due to the rising overall trend of cyptocurrencies with time.
The second component of developing your strategy is setting goals for each trade. This simply means determining the price points at which you will take profits or cut losses in advance. The importance of this is to allow you to remain level-headed during periods of extreme booms and busts. It is during these cycles that most amateur traders are most likely to make trading decisions based on emotions, becoming greedy during upswings and despondent after a market crash. The chart below shows the emotional cycle during a price cycle.
Source: Magnr
The advice from Warren Buffet to be fearful when others are greedy and greedy when others are fearful comes into play here. When others are greedy and buying more of the currency, this drives up the value significantly. One should be cautious in such cases, lest they overpay for asset which inevitable leads to diminished returns. When others are fearful and are selling, this drives down the price, which may present a good value buying opportunity.
2. Understand charts and know how to read them
At minimum, you need to able to understand charts enough to identify market trends. One of the most important basics that one needs to understand is the definition of Candlesticks, which provide information on the opening price, closing price, price direction and trading price range. One of the best resources to learn more on reading and understanding charts can be found on Coindesk. Coindesk is also a great resource for learning and understanding other aspects of cryptocurrencies such as how to calculate profitability if you decide on being a miner.
3. Education, education, education!
Similar to investing in stocks, knowledge and information form an important part of the cryptocurrency world.
The more you engage in educate and application, the more skilled you become.
This is true whether you choose to be a day trader or invest for the long term. Other than Coindesk, a great educational resource is Coin Pursuit. The appealing aspect of it is how it is linked to a Crypto Social Network called Slicefeeds, which allows for news and engagement on different cryptocurrencies. Coin Telegraph is another great resource. This site can be dubbed as the “Buzzfeed of cryptocurrencies”. It consists of a main dashboard with the latest news and stories primarily on Bitcoin an Etherum.